This may well be an understatement, but it has been an interesting year for financial markets, and it doesn’t look like it is finished yet. Tensions between the United States (US) and China remain, which you would think will be tested further after the outcome of the US presidential election. But what does this have to do with investing? Well, that depends on whether you want to think like an investor or like a gambler.
If your mindset is to achieve sustainable and growing returns over the long term then you’re thinking like an investor.
During COVID-19 lockdowns, the activity of speculating on the ups and downs of share prices has been prevalent. This is essentially gambling and that’s ok, go your hardest if that’s a game you want to play, however, the only problem with gambling is, as most people know already, gamblers tend to lose.
An investor’s mindset is one of owning a piece of that business. This requires owning a stock not for 10 minutes but for 10 years. Only when you treat shares as an ownership stake in a business does one’s approach to allocating capital change. Instead of betting on a price that shows up on a screen between 10:00 a.m. – 4:00 p.m. each day, you become interested in how the underlying business makes money, how it forms part of the business community and the economy and how it can grow over time.
Owning a business also affects the way you think about selling it.
If you owned a successful business here in Australia outright, would you sell it because of the concerns over who might win the US presidential election or because of a change in Europe’s inflation rate? Probably not, however, because we don’t own a publicly listed company outright, the share price is subjected to those sellers who react irrationally on whether or not ‘The Donald’ will keep his job or get punted.
The consequences of buying and selling being based on emotion, impatience and fear is that share prices become yo-yos. This can however, favour the investor who makes decisions based on the fundamentals of the ‘business’. If the share price falls yet the fundamentals of the business have not changed, an investor thinks about owning more of that great business, not rushing to the exit.
If the idea of investing in a quality business appeals more to you than punting on where the share price will be today, tomorrow, next week or in six months’ time, you’re an investor.
Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.